History of the US Monetary System:

The first coins used on the US mainland appeared in Massachusetts in 1652. Prior to that time the colonists had used Indian 'wampum' (decorative beads and shells), English coins, and Spanish dollars as a means of exchange. The 'wampum' were only useful for exchange with Native Americans, and the English controlled the movement of gold and silver. The English exported the gold and silver to England and prohibited their import from England to the colonies. Although the colonies minted their own low-value coinage (using tin and copper), the Spanish dollar (minted in silver and gold) was the principal means of exchange. This was primarily because the colonial coins were redeemable in Spanish dollars.

During the 18th century, each State came to issue its own coinage, payable in Spanish dollars. The States continued to issue their own coins during the Revolutionary War. However, this right ended with the ratification of the constitution in 1790. Henceforth, all coins were to be Federal money (the Bank of North America, established in 1781, was the first Federally authorized bank), though the States continued to maintain their own mints for the purpose of producing the Federal coins. Many members of Congress were firmly opposed to the notion of a federalized monetary system, and the issue remained contentious for decades after the adoption of the Constitution.
 



The issuance of Continentals, to provide financing for the revolution following the Declaration of Independence, may be regarded as the first instance of Federal money.


The Bank of the United States was established in 1791 with the US government as a shareholder, making it effectively the first US central bank. The US mint went into operation in 1792, minting low-denomination coins. It was not until 1796 that the full compliment of the US coinage came into existence (ranging from the half-cent piece to the $10 eagle).

The monetary system evolved slowly over the next century. The US monetary system as we know it today was not fully established until 1913, when Congress passed the Federal Reserve Act (see 'The Fed and the ECB - what's the difference?')

Possible Topics for Class Discussions:

  • What would travelling across the US be like if each State issued its own currency? Try planning a trip from coast-to-coast.
  • How well would the US economy function today if each of the States issued their own currency (e.g. in terms of international trade and investment, trade and investment between the States, the tourist industry, etc.)?
  • How stable would fifty currencies be, in contrast to the Federal dollar?

 


 
Classroom Exercise: Travelling in a US of 11 currencies

Introduction:

In the late 18th century, many Congressmen argued that the federalized monetary system, introduced with the ratification of the Constitution, was an infringement of the principle of State's Rights. Many Congressmen continued to press for the right of States to issue their own currency for several decades after 1790. Imagine that after the ratification of the Constitution, the States retained the right to issue their own currency.

This classroom simulation aims to introduce high school students to the EMU by confronting the problems Americans would face in travelling across a United States in which there are 11 different currencies rather than the single federal dollar. For the sake of simplicity, the US has been divided into 11 regions (see map) each with its own currency (see currency listing). Each of the currencies is equivalent in value to all the others.


Instructions:

1. Print out this map of the US

2. Download the list of currencies

3. Break the class up into several groups of students, each with their own copy of the map and their own listing of the currencies

4. Have each group plan a coast-to-coast trip, using the following guidelines:

a) Travelling time per day - 500 miles (8 hours at 60+ mph with two one-hour stops)
b) Overnight stop costs 50 units of the pertinent currency
c) Gas costs 2 units per gallon (there are 15 gallons per tank and consumption is 50 miles per gallon)
d) There are two currency exchange centers you can use to purchase the currency you need, as follows: 
 
Small Denomination Center:
  • Service charge of 4% on any exchange under 100 units
  • Service charge of 3% on any exchange over 100 units


Large Denomination Center

  • Service charge of 5% on any exchange under 100 units
  • Service charge of 2% on any exchange over 100 units


e) If you make use of credit cards, the following charges will apply:

  • Service charge of 4.5% on any exchange purchase under 100 units
  • Service charge of 2.5% on any exchange purchase over 100 units


5. The guidelines can be amended or developed as required; there is obviously no 'right' way to do this. The more time spent planning the trip, the greater the time cost involved (time is money). The students should not spend too much time on this exercise, just sufficiently enough for them to get a feel for the scale of the difference between having one currency in the US versus having a string of currencies.

6. Possible class discussion questions:
 

  • What made you decide which route to take?
  • How many different currencies did you decide to purchase and how much did it cost you (think in terms of financial cost and the time it cost you to make the calculations and purchase the currency)?
  • Where did you put off taking certain routes or visiting certain attractions because of exchange rates?
  • How much useless currency do you think you would be left with at the end of the trip?
  • The State's Rights issue of States maintaining their own currencies was vigorously debated in Congress both before the ratification of the Constitution and for decades afterwards. Do you think the Founding Fathers made a wise decision to opt for a single currency in the US?

 

Sources & Further Information:


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Part II. EMU [1] [2] [3] [4] [5] [6] [7] [8] [9] [10]